Chevron is Building a Massive Power Plant to Support a Microsoft AI Data Center. Here's What it Means for the Energy Stock.

Chevron (NYSE:CVX) has signed a 20-year power agreement with Microsoft (NASDAQ:MSFT) to support a massive AI data center project in Texas. The deal paves the way for the energy giant to build a large-scale natural gas-fired power plant to support the Microsoft facility. Known as Project Kilby, it will be one of the largest co-located gas power and data center projects in the country.

Here’s a look at Project Kilby and what it means for the energy stock.

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A massive bet on AI power

It’s no secret that AI data centers consume a lot of power. U.S. data center power demand is on track to double to 77 gigawatts (GW) by 2030, according to BloombergNEF. As a result, AI leaders such as Microsoft are locking up power sources to support their AI growth strategies.

Project Kilby will deliver about 2.67 GW of capacity upon completion. For perspective, that's enough to power around 2 million homes. Chevron, and its partner, Engine No. 1, would build the capacity through a phased, modular approach to supply incremental power over time as Microsoft needs additional energy for its data center campus. Chevron expects to make a formal Final Investment Decision (FID) on the project, which could cost around $7 billion, by the end of this year, putting it on track to start supplying power by 2028, with the full build-out continuing into the 2030s. GE Vernova would supply most of the gas turbines and associated electrical infrastructure, while Caterpillar subsidiary Solar Turbines would provide additional capacity.

Co-locating a new, large-scale power generation facility with the data center will enable Microsoft to obtain the reliable electricity needed to support the advanced compute requirements of its AI and cloud operations. It will also reduce the impact on the regional power grid.

A powerful new growth platform

Developing gas-fired power plants is a new business platform for Chevron. It will enable the global energy giant to leverage its natural gas resources in the Permian Basin and expertise in executing large-scale capital projects.

Chevron would supply the facility with locally produced gas from its vast Permian Basin resource base. By converting the gas to electricity, Chevron will generate more predictable cash flow backed by the 20-year power supply contract with Microsoft. That will help reduce some of the commodity price volatility of its oil and gas operations, further supporting resilient shareholder returns, including continued dividend increases. The company expects to generate a mid-teens return on its investment.

Project Kilby is likely the first of many gas-fired power projects Chevron will develop in the coming years to support AI data centers. When the energy giant formed its partnership with Engine No. 1 early last year, it aimed to deliver up to 4 GW of projects, with the potential to expand beyond that capacity. Given the massive power needs of AI data centers, it should have plenty of opportunities to develop additional projects in the future.

Adding to Chevron’s investment appeal

Chevron’s power deal with Microsoft offers two major benefits. It will enable the energy giant to generate predictable cash flows over the life of the 20-year contract, reducing some commodity price volatility. It also provides the company with a new growth engine as it could build more gas-fired power plants in the future to support AI energy demand. Those features make Chevron look even more appealing as a long-term investment.

Matt DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Caterpillar, Chevron, GE Vernova, and Microsoft. The Motley Fool has a disclosure policy.